Information note on the pronouncement of the Supreme Court relating to the statutory reserve of the remuneration of directors with executive or delegated functions

Since the 2014 rewrite of the Capital Companies Act in Spain (LSC), there are persisting issues surrounding the remuneration of directors, particularly the implementation of the Articles 217 and 249 LSC, as amended. The General Directorate of Registries and Notaries (DGRN) had issued a guideline for interpretation in 2016 which was affirmed by the Provincial Court in Barcelona in 2016. The interpretation allowed a distinction to be drawn between directors “as such” and directors with executive or delegated duties. The Supreme Court, in its pronouncement on 26 February 2018 has overturned this understanding and negated the “duality” of relationship between a director and the company. Since the 2014 rewrite of the Capital Companies Act in Spain (LSC), there are persisting issues surrounding the remuneration of directors, particularly the implementation of the Articles 217 and 249 LSC, as amended. The General Directorate of Registries and Notaries (DGRN) had issued a guideline for interpretation in 2016 which was affirmed by the Provincial Court in Barcelona in 2016. The interpretation allowed a distinction to be drawn between directors “as such” and directors with executive or delegated duties. The Supreme Court, in its pronouncement on 26 February 2018 has overturned this understanding and negated the “duality” of relationship between a director and the company.

The interpretation handed down by the DGRN had important business ramifications, namely:

The remunerations for the directors acting “as such” was to be governed by the rules in Article 217 LSC. Specifically, if they were to receive a remuneration, the same should be provided for in the company by-laws along with details of the remuneration system. The remunerations for the directors acting in an executive or delegated capacity, would be excluded from the remit of Article 217 and regulated solely by Article 249 LSC which would imply that their remuneration would not be subject to the requirements of the bylaws. This essentially placed their remuneration beyond the scrutiny of the general shareholder’s meeting; and,

Under the DGRN interpretation of the new rules, it became possible for executive directors (by delegation or under another title) to enter into a commercial contract with the company pursuant to Article 249.3 LSC. Thus Article 249.3 was understood as creating a separate relationship with separate remuneration where a termination compensation may be available to directors who dispense their role as executives.

The Supreme Court, in dismissing this dual model of business relationship, has stated that the provisions under Article 217 and 249 LSC are not mutually exclusive but cumulative. The court reminds us that the primary purpose of the proviso is to allow transparency and disclosure to shareholders to ensure that the interests of the company and those of the directors are aligned.

The ruling by the Supreme Court considers the commercial reality that companies, depending on size and industry of operation, opt for varying board structures. In smaller companies, the directors who perform the supervisory and advisory roles may also dispense executive functions. Larger companies may opt for a more complex board structure, where certain directors on the board are charged with additional executive roles. If some members of the board of directors exercise executive functions, they do so in their capacity as directors, because only in such capacity can they receive the delegation of the board. The law as it stands allows the delegation of executive powers to one or several of the members of the board under Article 249 LSC but the remunerations of such executive directors must be compliant with the overall remuneration system propounded under Article 217 LSC and approved by the general shareholder´s meeting in accordance with the law.

In clarifying the rules regarding remuneration of directors and interaction of the Articles 217 and 249 LSC, the Supreme Court plainly states that:

The company by-laws must contain the remuneration scheme to be used by the company for its directors, if the directors are to be so compensated (Article 23(e) and Article 217.1 LSC);

The maximum amount of annual remunerations for directors is set by the shareholders at the general shareholder´s meeting (Article 217.3 LSC), including the amount of executive director’s remuneration; and,

The distribution of the remuneration among the different directors will be governed by the agreement of the directors, or in case of a board, the decision of the board. In making such determinations, the board must reflect on the functions and responsibilities attributed to each director. In addition, if there is an executive director (by delegation or by another title) inside the Board, it is mandatory that the Board should previously approve the contract which provides the functions and the remuneration of the executive director. Therefore, any agreement signed under Article 249 LSC for performance of executive duties, will be a factor in this step. All agreements delegating executive functions to the directors must be approved by the board of directors, without the presence of the director affected by the rule, by two thirds of the board, pursuant to the requirements under Article 249.3 LSC.

Given the change in criteria, it seems that the position of the director is unpaid unless a remuneration scheme is expressly included in the by-laws. This unpaid remuneration will be referred by all type of directors (including executive directors). Additionally, the by-laws must also contain provisions for the remuneration of directors with executive or delegated functions. Accordingly, all companies must ensure that their by-laws are updated and contain adequate remuneration/compensation schemes for all directors, indiscriminate to the function they dispense. All companies must also ensure that the maximum remuneration for directors has been approved by the general shareholder´s meeting.

After the resolution of the Supreme Court we recommend the revision of those bylaws provisions referred to the director’s remuneration.